Price Wars Prompt Brokers to Boost Fund Sales

Discount brokerages increasingly aren't deriving a major portion of their revenues from traditional trading commissions, but from businesses related to banking and mutual funds, BusinessWeek reports.

The shift towards non-trading revenue stems from intense price wars among brokerages, even as investors' return to the markets drives up the volume of retail trading. In 1994, for instance, Charles Schwab earned 51% of its revenues from trading commissions. This year, the firm expects to earn merely 16% of its revenues from commissions. Similarly, rival E*Trade, whose trading commissions accounted for 88% of its revenues in 1994, will see that component drop to 37% this year.

As price cuts dampen commission fees, brokerage firms are putting more of their resources into asset management and mutual fund sales. Schwab, in particular, is far ahead of its competitors, managing over $1 trillion in assets, compared to the $80 billion each that Ameritrade and E*Trade manage.

This change in revenue stream, analysts say, makes a case for valuing discount brokerages as if they were banks and asset managers. In the past, discount brokerages generally have had price-to-earnings ratios in the 20's because surges in retail trading can suddenly enhance their earnings. Publicly traded fund companies and banks, on the other hand, generally have sported P/E's in the high teens. But because brokerages' trading volumes and commissions have been so volatile in the recent years, leaving them more reliant on non-trading income, analysts have begun to rethink their valuations.